QCD Rules and Regulations for Tax-Efficient Charitable Giving

Are you concerned about required minimum distributions (RMDs) bumping you into a higher tax bracket? If you are among the charitably inclined, your donations could offset the increase to your taxable income. 

In this insight, we will go over what QCDs are, how they can help you lower tax liability (and even other expenses), and some important QCD rules and limitations to understand.

What is a QCD?

A qualified charitable distribution (QCD) is an election to make a direct distribution from your IRA to one or more qualified charities. It is a strategy that, in many cases, has become even more impactful since the passage of the Tax Cuts and Jobs Act of 2017. 

You cannot claim a charitable deduction for a QCD. The benefit of a QCD is the exclusion of the distribution from taxable income (see below), not an additional itemized deduction. The Tax Cuts and Jobs Act of 2017 raised the standard deduction and imposed limitations on itemized deductions. For many taxpayers, this led to a shift from itemizing to taking standard deductions, which led to a big issue: charitable contributions were no longer providing a tax benefit if you now take the standard deduction.

QCDs present you with a way around that. When you utilize a QCD, you are using pre-tax dollars in an IRA and preventing these dollars from being included in taxable income. This effectively achieves the same tax benefit as itemizing prior to 2017. For this reason, even if you do not have an RMD to contend with, i.e., those between age 70 ½ to 72, you may still find a QCD to be a smart tax strategy

Note: “Qualified Charities” do not include private foundations, supporting organizations, and donor-advised funds (please consult with a tax expert to determine if your charity qualifies). 

Who can make a QCD?

If you are 70 ½ or older and have funds in a traditional IRA, you can complete QCDs. 

Benefits of QCDs

QCDs have multiple tax advantages. The primary benefit of making a QCD is that you can reduce or eliminate the RMD, which effectively lowers your taxable income and tax liability for the year. In addition, by reducing an RMD, the QCDs also lower your adjusted gross income (AGI), which provides indirect benefits. AGI is the basis used for various tax calculations; by reducing AGI, the following items are potentially reduced:

1. Medicare premium costs: higher AGI can trigger Income-Related Monthly Adjustment Amounts, or IRMAA.
2. The taxable portion of Social Security: up to 85% of benefits may become taxable depending on AGI.
3. Net investment income Medicare surtax: 3.8% surtax applies if AGI exceeds certain thresholds.
4. The medical expense deduction threshold: only medical expenses exceeding 7.5% of AGI are deductible.
5. State tax liabilities: many states use federal AGI as the basis for calculating income tax.

QCD Rules and Limitations

While making a QCD is a relatively straightforward process, there are some important restrictions to be aware of. Donations must follow these guidelines:

1. The transfer must go straight from the Traditional IRA to a qualified public charity. QCDs cannot be gifts made to private grant-making foundations or donor-advised funds.
2. The annual QCD max is $108,000 per individual, or $216,000 for married couples filing jointly.
3. The taxpayer must be 70 ½ years or older at the time of distribution.
4. If an RMD has already been taken, one cannot undo this and replace it with a QCD.
5. The QCD must be completed and cashed by the charity by December 31, so plan ahead to avoid any complications.
6. The taxpayer should inform his or her accountant to ensure the distribution is properly coded. Starting in 2025, custodians must now include QCDs on your 1099-R.

Learn More About How to Align Tax-Efficient Charitable Giving with Your Personal Financial Plans

A Qualified Charitable Distribution can be a powerful way to support the causes you care about while also reducing your taxable income. 

It’s one of several tools that can help make your charitable giving more efficient and aligned with your long-term goals.

To determine whether a QCD fits into your overall strategy, we invite you to reach out to schedule a complimentary consultation with a Wealthstream Advisor.